How IVAs Affect Your Credit Rating
An individual voluntary arrangement is a form of insolvency and debt solution that involves a reduced payment plan over an extended term. While it can be a great solution to escape growing debt that you couldn’t otherwise pay off, it will also adversely affect your chances of taking out any credit in the future.
Your credit rating is essentially your financial footprint. It is a record of all of your past dealings with credit and payments, set up so that any future lenders can assess your eligibility to borrow.
Any missed payments for loans or bills will be noted as a mark against you on your credit rating and any payments made on time will improve it.
Importantly, if you’ve never used any kind of credit before, your credit rating will be weaker than if you’ve had, say, several loans and credit cards and have not missed a payment on any of them.
Your credit rating is crucial if you want to use any credit in the future as it will be a deciding in factor both in terms of how good a loan or credit card you can take out, and whether or not you’ll be able to one at all.
Having an IVA will make a negative mark on your credit rating, but not permanently. Indeed the chances are that if you need an IVA, your credit rating won’t be particularly good to begin with due to missed or late loan repayments. In this sense, using an IVA can, in the long term, improve your credit score by allowing you to eventually pay off everything you owe and start afresh.
Individual Insolvency Register
When you start an IVA, a record of it will be placed on the public Individual Insolvency Register (IIR) and will stay there until the agreement is finished.
Being on the IIR will adversely affect your credit rating and therefore your ability to acquire any new credit during the course of the IVA.
The same applies if you declare bankruptcy.
Getting New Credit During the IVA
Setting up an IVA will make it far more difficult to take out any new credit, both during the term of the agreement, and for a while after it has finished.
There will be certain exceptions to this though:
- If you need credit for any living essentials or for certain purposes related to the wellbeing of your family, then you may be able to do so, or
- If you are the owner of a company or are self-employed, then you may able to access credit to use for your business.
However, given the fact that your credit rating will be much worse than usual during the IVA, you will more than likely find that if you are able to take out any new credit, the interest charged will be significantly higher than it would be otherwise.
Officially, if you wish to take out any credit worth more than £500 while your IVA is active, then you’ll need to obtain written permission from your insolvency practitioner. The only exception to this is if you need the credit in order to pay for any utility bills.
Long Term Effects on Your Credit Rating
A record of your IVA will be on the IIR until the agreement is finished. However, it will remain as a mark on your credit file for six years after the agreement began. It is worth bearing this in mind if you plan to use any credit in the future as, while the IVA is marked on your credit report, you’ll find it harder and/or more expensive to borrow any money.